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Geopolitical risk and economic policy uncertainty: Different roles in China's financial cycle

Author

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  • Che, Ming
  • Zhu, Zixiang
  • Li, Yujia

Abstract

This paper investigates the distinct roles of geopolitical risk (GPR) and economic policy uncertainty (EPU) in China's financial cycle and their high correlation. Our findings reveal that the impact of a GPR shock on China's financial cycle is more significant than that of an EPU shock. Furthermore, the direct effect of GPR shock is the primary contributor to China's financial cycle's impact, while the indirect effect of EPU shock mainly comes from pushing up GPR. We also note that the common shock is the primary driver of the indirect effects of GPR and EPU on the financial cycle, with minor lagged effects. Finally, in our time-varying analysis, we observe that after 2010, an EPU shock led to a downturn in China's financial cycle and had a more significant indirect impact than in any other period.

Suggested Citation

  • Che, Ming & Zhu, Zixiang & Li, Yujia, 2023. "Geopolitical risk and economic policy uncertainty: Different roles in China's financial cycle," International Review of Financial Analysis, Elsevier, vol. 90(C).
    • Handle: RePEc:eee:finana:v:90:y:2023:i:c:s1057521923003836
    DOI: 10.1016/j.irfa.2023.102867
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